Item 7. Management’s Discussion and Analysis
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis includes forward-looking statements about the Company’s business and consolidated results of operations for the fiscal years ended December 31, 2024 and 2023, including discussions about management’s expectations for the Company’s business. These statements represent projections, beliefs and expectations based on current circumstances and conditions and in light of recent events and trends, and these statements should not be construed either as assurances of performance or as promises of a given course of action. Instead, various known and unknown factors are likely to cause the Company’s actual performance and management’s actions to vary, and the results of these variances may be both material and adverse. A description of material factors known to the Company that may cause its results to vary, or may cause management to deviate from its current plans and expectations, is set forth under “Risk Factors” in this report. See also “Forward-Looking Statements.” The following discussion should also be read in conjunction with the Company’s consolidated financial statements and the related Notes included in this report.
Executive Overview
The Company designs, engineers, manufactures, markets and sells a broad range of advanced, emission-certified engines and power systems that run on a wide variety of clean, alternative fuels, including natural gas, propane, and biofuels, as well as gasoline and diesel options, within the power systems, industrial and transportation end markets with primary manufacturing, assembly, engineering, R&D, sales and distribution facilities located in suburban Chicago, Illinois and Darien and Beloit, Wisconsin. The Company provides highly engineered, comprehensive solutions designed to meet specific customer application requirements and technical specifications, including those imposed by environmental regulatory bodies, such as the EPA and the CARB.
The Company’s products are primarily used by global OEM and end-user customers across a wide range of applications and equipment that includes standby and prime power generation, demand response, microgrid, combined heat and power, arbor care, material handling (including forklifts), agricultural and turf, construction, pumps and irrigation, compressors, utility vehicles, light- and medium-duty vocational trucks, school and transit buses, and utility power. The Company manages the business as a single reporting segment.
25
Net sales by geographic area and by end market for 2024 and 2023 are presented below:
(in thousands) For the year ended December 31, 2024 For the Year Ended December 31, 2023
Geographic Area % of Total % of Total
United States $ 419,706 88 % $ 378,886 83 %
North America (outside of United States) 24,466 5 % 21,265 5 %
Pacific Rim 24,652 5 % 39,822 8 %
Europe 7,090 2 % 13,815 3 %
Others 53 — % 5,185 1 %
Total $ 475,967 100 % $ 458,973 100 %
(in thousands) For the year ended December 31, 2024 For the Year Ended December 31, 2023
End Market % of Total % of Total
Power Systems $ 325,749 68 % $ 225,106 49 %
Industrial 123,268 26 % 160,334 35 %
Transportation 26,950 6 % 73,533 16 %
Total $ 475,967 100 % $ 458,973 100 %
During 2024, the Company sold over 22,200 engines of which approximately 76% utilized propane or natural gas as their fuel source and 13% utilized gasoline. The remaining 11% of engines were dual fuel gasoline/propane, diesel and service engines. During 2023 , the Company sold over 33,500 engines of which approximately 76% utilized propane or natural gas as their fuel source and 17% utilized gasoline. The remaining 7% of engines were dual fuel gasoline/propane, diesel and service/base engines.
Weichai Transactions
The Company sought to expand its range of products and its presence in the Pacific Rim through the Weichai Transactions (see Note 3. Weichai Transactions , included in Item 8. Financial Statements and Supplementary Data , for additional information).
The Company and Weichai executed the Collaboration Agreement in order to achieve their respective objectives, enhance the cooperation alliance and share experiences, expertise and resources. Among other things, the Collaboration Arrangement established a joint steering committee, permitted Weichai to employ a limited number of technical, marketing, sales, procurement and finance personnel to work at the Company and established several collaborations related to stationary natural-gas applications and Weichai diesel engines. The Collaboration Agreement also provides for the steering committee to create various subcommittees with operating roles and otherwise governs the treatment of intellectual property of the parties prior to the collaboration and the intellectual property developed during the collaboration. On March 22, 2023, the Collaboration Agreement was extended for an additional term of three years. The Company’s sales to Weichai were $1.8 million and $1.7 million during 2024 and 2023, respectively. The Company purchased $21.5 million and $6.2 million of inventory from Weichai during 2024 and 2023, respectively.
PSI is party to the SLA with Weichai. See Note 6. Debt , included in Item 8. Financial Statements and Supplementary Data , for additional information.
Legal Settlement Expenses
Legal settlements included in the 2024 operating results, were a benefit of $4.7 million (see Note 11. Commitments and Contingencies , included in Part II. Item 8. Financial Statements and Supplementary Data , for additional information).
Recent Trends and Business Outlook
PSI’s growth in net revenue in 2024 was driven by power systems markets, including data center and oil and gas products, partially offset by lower sales from more mature, lower-margin markets such as transportation. This shift in markets reflects the
26
Company’s conscious strategic prioritization toward higher growth, higher-margin markets with less emphasis on more mature markets.
The Company is focused on leading the business through a growth phase with a stronger balance sheet while strategically prioritizing products that demonstrate strong demand and higher gross margins. Consistent with those goals, the Company is actively pursuing several initiatives to enhance and expand manufacturing capacity to meet the increasing demand from data center markets. Pivoting the focus to these markets is driving current net sales growth and profitability. Through expanded capacity and strategic partnerships, management expects this positive trend to continue.
PSI’s business is impacted by the current macroeconomic and geopolitical environment, which has contributed to differing levels of recovery in the global economy. For example, although the oil and gas market, in which the Company has historically operated, has experienced year over year growth from its historic lows, sales levels may not reach their previous higher levels because of rising crude oil prices and lower rig counts. The Company has been actively navigating these challenges by balancing its investments, expenses, pricing and sales efforts in this market as well as others.
In addition to prioritizing gross profit, the Company is committed to efficiently managing expenses, including streamlining operating expenses and prioritizing certain R&D investments in support of long-term growth objectives. The Company is committed to focusing on growth opportunities and investment while also optimizing its cost structure to enhance growth and profitability, ultimately delivering sustained value to our shareholders.
The Company continues to experience inflationary cost pressures for certain raw materials and other goods, which the Company continues to try to mitigate through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for its supply chain products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where available. The potential for continued economic uncertainty and unfavorable oil and gas market dynamics may have a material adverse impact on the levels of future customer orders and the Company’s future business operations, financial condition and liquidity.
The Company is party to several legal contingencies. Se e Note 11. Commitments and Contingencies for further discussion of the Company’s indemnification obligations.
The Company anticipates an increase in sales for 2025 compared to 2024, driven by expected growth in the power systems end market including products supporting data centers , while sales in the industrial and transportation end markets are projected to remain about flat. N otwithstanding this outlook, which is being driven in part by expectations for stable supply chain dynamics and a continuation of favorable economic conditions within the United States and across the Company’s various markets, the Company cautions that significant uncertainty remains as a result of supply chain challenges, inflationary costs, commodity volatility, ongoing geopolitical and macroeconomic uncertainties, especially with the latest tariff announcements and the possible impact on trade between the USA and the rest of the world, among other factors.
Hyster-Yale Supply Arrangemen t : In 2023 , Hyster-Yale began using alternative suppliers for several high-volume engines that the Company provides, including the 2.0L and 2.4L engines, due in part to supply chain issues related to UFLPA enforcement. As a result, the Company experienced a decline in sales volumes to Hyster-Yale in 2024.
Strategic Initiatives/Growth Strategies : The Company has initiated various business objectives aimed at improving profitability, streamlining processes, strengthening the business and focusing on achieving growth in higher-return product lines. Central to this plan is the Company’s increased emphasis on power systems product offerings through new product development and investments, in addition to leveraging the Company’s relationship with Weichai. With the recent introduction of numerous natural gas and diesel engines, coupled with its existing strong product lineup, the Company believes that it has a solid foundation to achieve long-term growth, particularly within the power systems market.
27
Results of Operations
Results of operations for the year ended December 31, 2024 compared with the year ended December 31, 2023 :
(in thousands, except per share amounts) For the Year Ended December 31,
2024 2023 Change % Change
Net sales
(from related parties $1,766 and $2,449 for the year ended December 31, 2024 and 2023, respectively)
$ 475,967 $ 458,973 $ 16,994 4 %
Cost of sales
(from related parties $1,304 and $1,790 for the year ended December 31, 2024 and 2023, respectively)
335,430 353,109 (17,679) (5) %
Gross profit 140,537 105,864 34,673 33 %
Gross margin % 29.5 % 23.1 % 6.4 %
Operating expenses:
Research and development expenses 20,056 19,457 599 3 %
Research and development expenses as a % of sales 4.2 % 4.2 % — %
Selling, general and administrative expenses 37,378 40,386 (3,008) (7) %
Selling, general and administrative expenses as a % of sales 7.9 % 8.8 % (0.9) %
Amortization of intangible assets 1,459 1,746 (287) (16) %
Total operating expenses 58,893 61,589 (2,696) (4) %
Operating income 81,644 44,275 37,369 84 %
Interest expense (from related parties $6,998 and $7,729 for the year ended December 31, 2024 and 2023, respectively)
11,443 17,069 (5,626) (33) %
Income before income taxes 70,201 27,206 42,995 158 %
Income tax expense 922 900 22 NM
Net income $ 69,279 $ 26,306 $ 42,973 163 %
Earnings per common share:
Basic $ 3.01 $ 1.15 $ 1.86 162 %
Diluted $ 3.01 $ 1.15 $ 1.86 162 %
Non-GAAP Financial Measures:
Adjusted net income * $ 64,675 $ 26,552 $ 38,123 144 %
Adjusted income per share * $ 2.81 $ 1.17 $ 1.64 140 %
EBITDA * $ 86,843 $ 49,875 $ 36,968 74 %
Adjusted EBITDA * $ 82,239 $ 50,121 $ 32,118 64 %
NM Not meaningful
* See reconciliation of non-GAAP financial measures to GAAP results below
Net Sales
Net sales increased $17.0 million, or 4%, compared to 2023, as a result of sales increases of $100.6 million in the power systems end market, partly offset by decreases of $37.1 million and $46.6 million within the industrial and transportation end markets, respectively. Higher power systems end market sales were primarily due to increased demand for products across various applications, with the largest increases attributable to products used within the packaging market such as enclosures serving the fast-growing data center market, and oil and gas products. The Company is strategically prioritizing the rapidly expanding data center sector, improving and increasing our manufacturing capacity and capabilities to meet our customers’ evolving demands for our products. Decreased industrial end market sales are primarily due to decreases in demand for products used within the material handling and arbor care markets, as well as the direct effects of enforcement of the UFLPA, which limited the Company’s ability to import certain raw materials. The decreased sales within the transportation end market were primarily attributable to lower sales in the truck and school bus market from ceasing sales of emission-certified engines into this market, and new compliance and regulatory requirements that changed engine product offerings in this market.
28
Gross Profit
Gross profit increased by $34.7 million, or 33%, to $140.5 million in 2024, compared to $105.9 million in 2023. Gross margin was 29.5% and 23.1% in 2024 and 2023, respe ctively. The increase in gross margin is primarily due to improved sales mix, pricing actions, higher operating efficiencies, and lower warranty costs primarily attributable to the Company’s sales shift away from certain transportation customers. For the year ended December 31, 2024, warranty costs were $6.5 million, a decrease of $6.5 million compared to warranty costs of $13.0 million in the same period last year, mainly attributable to changes in estimates for preexisting warranties. A majority of the warranty activity is attributable to products sold within the transportation end market in prior years.
Research and Development Expenses
R&D expenses in 2024 and 2023 were $20.1 million and $19.5 million, respectively. The increase of $0.6 million, or 3%, was primarily related to the testing of new products.
Selling, General and Administrative Expenses
Selling, general and administrative (“SG&A”) decreased in 2024 by $3.0 million , or 7%, compared to 2023. The decrease is primarily due to a decrease in accrued legal settlements of $4.7 million, lower professional fees and the decrease in selling expenses associated with decreased sales in the transportation market.
Interest Expense
Interest expense decreased $5.6 million to $11.4 million in 2024 from $17.1 million in 2023, largely due to reduced outstanding debt and lower overall effective interest rates. See Note 6. Debt , included in Item 8. Financial Statements and Supplementary Data for additional information.
Income Tax Expense
The Company recorded income tax expense of $0.9 million in both 2024 and 2023. The Company’s pretax income was $70.2 million in 2024, compared to pretax income of $27.2 million in 2023. The Company continues to utilize NOLs along with other tax credits to lower its effective tax rate. The Company continues to record a full valuation allowance against deferred tax assets.
See Note 12. Income Taxes , included in Item 8. Financial Statements and Supplementary Data , for additional information related to the Company’s income tax provision.
Non-GAAP Financial Measures
In addition to the results provided in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) above, this report also includes non-GAAP (adjusted) financial measures. Non-GAAP financial measures provide insight into selected financial information and should be evaluated in the context in which they are presented. These non-GAAP financial measures have limitations as analytical tools and should not be considered in isolation from, or as a substitute for, financial information presented in compliance with U.S. GAAP, and non-GAAP financial amounts as reported by the Company may not be comparable to similarly titled measures reported by other companies. The non-GAAP financial measures should be considered in conjunction with the consolidated financial statements, including the related notes, and Management’s Discussion and Analysis of Financial Condition and Results of Operations included in this report. Management does not use these non-GAAP financial measures for any purpose other than the reasons stated below.
Non-GAAP Financial Measure Comparable GAAP Financial Measure
Adjusted net income Net income
Adjusted net income per share – diluted Net income per share – diluted
EBITDA Net income
Adjusted EBITDA Net income
The Company believes that Adjusted net income, Adjusted net income per share – diluted, EBITDA, and Adjusted EBITDA provide relevant and useful information, which is widely used by analysts, investors and competitors in its industry as well as by the Company’s management in assessing the performance of the Company. Adjusted net income is defined as net income as adjusted for certain items that the Company believes are not indicative of its ongoing operating performance. Adjusted net income per share – diluted is a measure of the Company’s diluted earnings per common share adjusted for the impact of special items. EBITDA provides the Company with an understanding of earnings before the impact of investing and financing charges and income taxes. Adjusted EBITDA further excludes the effects of other non-cash charges and certain other items that do not reflect the ordinary earnings of the Company’s operations.
29
Adjusted net income, Adjusted net income per share – diluted, EBITDA, and Adjusted EBITDA are used by management for various purposes, including as a measure of performance of the Company’s operations and as a basis for strategic planning and forecasting. Adjusted net income, Adjusted net income per share – diluted, and Adjusted EBITDA may be useful to an investor because these measures are widely used to evaluate companies’ operating performance without regard to items excluded from the calculation of such measures, which can vary substantially from company to company depending on the accounting methods, the book value of assets, the capital structure and the method by which the assets were acquired, among other factors. They are not, however, intended as alternative measures of operating results or cash flow from operations as determined in accordance with U.S. GAAP.
The following table presents a reconciliation from Net income to Adjusted net income:
(in thousands) For the Year Ended December 31,
2024 2023
Net income $ 69,279 $ 26,306
Stock-based compensation 1
89 151
Legal Settlements 2
(4,693) 195
Insurance proceeds 3
— (100)
Adjusted net income $ 64,675 $ 26,552
The following table presents a reconciliation from Net income per share – diluted to Adjusted net income per share – diluted:
For the Year Ended December 31,
2024 2023
Net income per share – diluted $ 3.01 $ 1.15
Stock-based compensation 1
— 0.01
Legal Settlements 2
(0.20) 0.01
Adjusted net income per share – diluted $ 2.81 $ 1.17
Diluted shares (in thousands) 23,018 22,973
The following table presents a reconciliation from Net income to EBITDA and Adjusted EBITDA:
(in thousands) For the Year Ended December 31,
2024 2023
Net income $ 69,279 $ 26,306
Interest expense 11,443 17,069
Income tax expense 922 900
Depreciation 3,740 3,854
Amortization of intangible assets 1,459 1,746
EBITDA 86,843 49,875
Stock-based compensation 1
89 151
Legal Settlements 2
(4,693) 195
Insurance proceeds 3
— (100)
Adjusted EBITDA $ 82,239 $ 50,121
1. Amounts reflect non-cash stock-based compensation expense and have no material impact on the Adjusted net income per share – diluted for the year ended December 31, 2024 and 2023 .
2. Amounts include legal settlements f or the year ended December 31, 2024 and 2023 .
3. Amounts include insurance recoveries related to a prior year incident and have no material impact on the Adjusted net income per share – diluted f or the year ended December 31, 2024 and 2023 .
30
Cash Flows
Cash was impacted as follows:
(in thousands) For the Year Ended
December 31,
2024 2023 Change % Change
Net cash provided by operating activities $ 62,390 $ 70,512 $ (8,122) (12) %
Net cash used in investing activities (4,559) (5,020) 461 (9) %
Net cash used in financing activities (25,934) (66,798) 40,864 (61) %
Net increase (decrease) in cash, cash equivalents, and restricted cash $ 31,897 $ (1,306) $ 33,203 NM
Capital expenditures $ (4,559) $ (5,036) $ 477 (9) %
NM Not meaningful
Cash Flow from Operating Activities
Net cash provided by operations was $62.4 million in 2024 compared to net cash provided by operations of $70.5 million in 2023, a decrease of $8.1 million in cash provided by operating activities year-over-year . The decrease in cash provided by operating activities primarily resulted from a $44.5 million decrease of cash provided by working capital accounts, partially offset by an increase in earnings of $43.0 million. The decrease in cash generated from working capital was primarily related to, purchases of inventory and lower collections on accounts receivable for the year ended December 31, 2024 compared to December 31, 2023 .
Cash Flow from Investing Activities
Net cash used in investing activities was $4.6 million for the year ended December 31, 2024 compared to cash used in investing activities of $5.0 million for year ended December 31, 2023, respectively . For the years ended December 31, 2024 and 2023, cash used in investing activities related to capital expenditures.
Cash Flow from Financing Activities
The Company used $25.9 million in cash from financing activities during the year ended December 31, 2024 compared to $66.8 million in cash used by financing activities during the year ended December 31, 2023. The cash used by financing activities for the year ended December 31, 2024 was due to proceeds from the new Revolving Credit Agreement and payments made on the SLA and other debt. Cash used in 2023 was primarily attributable to repayment of existing debt during the year. Se e additional discussion below and in Note 6. Debt in Item 8. Financial Statements and Supplementary Data related to the amendments of the Company’s debt arrangements .
Liquidity and Capital Resources
The Company’s sources of funds are cash flows from operations, borrowings made pursuant to its credit facilities and shareholder’s loan agreements, and cash and cash equivalents on hand. Uses of funds include payments of principal on our debt facilities and shareholder’s loan agreements, capital expenditures, and working capital needs.
While the Company has achieved profitability and generated positive cash flows from operating activities in 2024, uncertainties exist about the Company’s ability to refinance, extend, or repay its outstanding indebtedness. As of December 31, 2024 , the Company’s total outstanding debt obligations under the Revolving Credit Agreement , the SLA, finance leases and other debt, all of which are short-term requirements, were $120.2 million in the aggregate, and its cash and cash equivalents were $55.3 million. See Item 8. Financial Statements and Supplementary Data , Note 6. Debt, for additional information.
The Company’s ability to continue as a going concern is dependent on extending and amending, refinancing or repaying the indebtedness outstanding under the Company’s existing debt arrangements. Without additional financing, the Company anticipates that it will not have sufficient cash and cash equivalents to repay amounts owed under its existing debt arrangements as they become due, which raises substantial doubt about the Company’s ability to continue as a going concern within one year from the date of filing. In order to provide the Company with a more permanent source of liquidity, management plans to seek an extension and amendment and/or replacement of its existing debt agreements or seek additional liquidity from its current or other lenders before the maturity dates in 2025. There can be no assurance that the Company’s management will be able to successfully complete an extension and amendment of its existing debt agreements or obtain new financing on acceptable terms, when required or if at all.
PSI’s business is impacted by the current macroeconomic and geopolitical environment, which has contributed to differing levels of recovery in the global economy. For example, although the oil and gas market, in which the Company has historically operated, has experienced year over year growth from its historic lows, sales levels may not reach previous higher levels
31
because of rising crude oil prices and lower rig counts. The Company continues to experience inflationary cost pressures for certain raw materials and other goods which the Company continues to try to mitigate through price increases and other cost reduction measures. Additionally, the Company continues to experience ongoing tariff costs for its supply chain products and is trying to mitigate these impacts through price increases and other measures, such as seeking certain tariff exclusions, where possible. The potential for continued economic uncertainty and unfavorable oil and gas market dynamics may have a material adverse impact on the levels of future customer orders and the Company’s future business operations, financial condition and liquidity.
At December 31, 2024, the Company had four outstanding letters of credit totaling $1.4 million. See Item 8. Financial Statements and Supplementary Data, Note 11. Commitments and Contingencies for additional information related to the Company’s off-balance sheet arrangements and the outstanding letters of credit.
Commitments and Contingencies
Legal matters are further discussed in Note 11. Commitments and Contingencies , included in Item 8. Financial Statements and Supplementary Data . See Part I. Item 1A. Risk Factors for further discussion of legal risks to the Company.
Critical Accounting Estimates
The Company’s consolidated financial statements are prepared in accordance with U.S. GAAP. Preparation of these financial statements requires the Company to make estimates, assumptions and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. The Company’s most critical accounting policies and estimates are those most important to the portrayal of its financial condition and results of operations which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates regarding matters that are inherently uncertain. The Company has identified the following as its most critical accounting policies and judgments. Although management believes that its estimates and assumptions are reasonable, they are based on information available when they are made and, therefore, may differ from estimates made under different assumptions or conditions.
The Company’s significant accounting policies are discussed in Note 1. Summary of Significant Accounting Policies and Other Information , included in Item 8. Financial Statements and Supplementary Data , and should be reviewed in connection with the following discussion of accounting policies that require difficult, subjective, and complex judgments and estimates.
Revenue Recognition
Revenue for the Company is generated from contracts when performance obligations under terms of the contract with a customer are satisfied, which is generally when control of the product has been transferred to the customer. For contracts with customers that include multiple performance obligations, judgment is required to determine whether performance obligations specified in these contracts are distinct and should be accounted for as separate revenue transactions for recognition purposes. For the majority of the Company’s products, revenue is recognized when the products are shipped or delivered to the customer based on the shipping terms which is usually when control passes to the customer. Conversely, the Company recognizes revenue throughout the manufacturing process when constructing because the customer receives the benefit of the asset as the product is constructed. The Company recognizes revenue related to extended warranty programs based on the passage of time over the extended warranty period.
The allowance for credit losses is our best estimate of the amount of estimated lifetime credit losses in our accounts receivable. We regularly review the adequacy of our allowance for credit losses.
The credit environment in which our customers operate has been relatively stable over the past few years and the Company collections are bolstered by a robust collections department. Total bad debt expense was less than $0.1 million in both 2024 and 2023. If circumstances change, due to the occurrence of higher-than-expected defaults or a significant adverse change in a major customer’s ability to meet our financial obligations such as bankruptcies, estimates of the recoverability of receivable amounts due could be reduced.
Refer to Note 2. Revenue of the notes to the consolidated financial statements for more information on the Company’s revenue recognition.
Goodwill Impairment
Goodwill and indefinite-lived intangible assets are evaluated for impairment annually as of October 1 and whenever events or circumstances make it more likely than not that impairment may have occurred or when required by accounting standards. We test goodwill and individual indefinite-lived intangible assets for impairment at a single reporting unit level. These assessments may be performed quantitatively or qualitatively.
We have not made any changes in 2024 to our reporting unit or the accounting methodology we use to assess impairment loss on goodwill and indefinite-lived intangible assets. In 2024, management performed an assessment of the impairment of
32
goodwill for our reporting unit and indefinite-lived intangible assets using a quantitative approach, which indicated that the fair values the reporting unit and indefinite-lived intangible assets were substantially in excess of their carrying values. Therefore, no indications of impairment were identified.
The Company performs its annual impairment test using the discounted cash flow method which involves the Company’s management making estimates with respect to a variety of factors that will significantly impact the future performance of the business, including the following:
• future volume projections;
• estimated margins on sales;
• estimated growth rate for SG&A costs;
• future effective tax rate; and
• weighted-average cost of capital (“WACC”) used to discount future performance of the Company.
Because these estimates form a basis for the determination of whether the impairment charge should be recorded, these estimates are considered to be critical accounting estimates. S ee Note 1. Summary of Significant Accounting Policies and Other Information , included in Item 8. Financial Statements and Supplementary Data for further discussion.
Warranty
The Company offers a standard limited warranty on the workmanship of its products that in most cases covers defects for a defined period, warranties mandated by governments and warranties for products that carry limited warranties from suppliers. The Company estimates and records a liability and related charges to income for its warranty program at the time products are sold to customers. Estimates are based on historical experience and reflect management’s best estimates of expected costs at the time products are sold.
When the Company identifies cost effective opportunities to address issues in products sold or corrective actions for safety issues, it initiates product recalls or field campaigns. As a result of the uncertainty surrounding the nature and frequency of product recalls and field campaigns, the liability for such actions is generally recorded when the Company commits to a product recall or field campaign. When collection is reasonably assured, the Company also estimates the amount of warranty claim recoveries to be received from its suppliers. Warranty costs and recoveries are included in Cost of sales in the Consolidated Statements of Income. Warranty costs and recoveries are included in Cost of sales in the Consolidated Statements of Income. S ee Note 1. Summary of Significant Accounting Policies and Other Information , included in Item 8. Financial Statements and Supplementary Data for further discussion.
Impact of New Accounting Standards
For information about recently issued accounting pronouncements, see Note 1. Summary of Significant Accounting Policies and Other Information , included in Item 8. Financial Statements and Supplementary Data .
Item 7A. Quantitative and Qualitative Disclosures about Market Risk.
The Company is a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and is not required to provide the information under this item.
33